Daniel Clément, CFA, Pl. Fin.
Portfolio Manager and Financial Planner
Pratte Portfolio Management
Share your opinion: dclement@pratte.ca
I'm sure you'll agree that the first 10 months of our trading year have been extremely challenging. We might even add that our challenges began a little earlier, in mid-November of 2021. Indeed, like the Nasdaq, the Pratte North American Equity Fund, which held a fairly strong position in the technology sector towards the end of 2021, saw its descent begin a little earlier than the market as a whole. The more difficult times drag on, the more emotional people tend to become. It's understandable, but is it the right behavior for an investor?
There are many reasons for our negative start to the year on the stock market, from inflation and central banks' management of monetary policy to the war in Ukraine and China's zero-tolerance pandemic policy. It's important for us as a firm, and for you as an investor, to target and understand them, so that we can learn from the times we live in. Once you've learned what you need to know, however, there's no point in dwelling on the negative; it's important to leave the past in the past. The stock market is a bit about the present, a lot about the future, but it's certainly not about the past. Quite simply, we use the past to try and predict the future.
I'm lucky enough to meet people on a daily basis in the course of my work. This enables me to assess people's degree of optimism and confidence in the economy and financial markets at first hand. I have to admit that over the past 2 or 3 months, sentiment seems to have deteriorated. With good reason, people are bemoaning the high level of geopolitical uncertainty in the world today. And, to be honest, I share the same apprehensions. Things are not going well in the world at the moment. But I'd like to qualify that, as far back as I can remember, things haven't been going badly for a long time. I don't think we've had much respite since the Second World War. So, markets have learned to cope with geopolitical tensions over time, and investors need to do the same.
Today, I'd like to focus on what I believe to be good investor behavior. It's all about remaining rational, neutral and objective at all times. In normal times, meetings with clients consist of assessing their risk tolerance, establishing their LONG-TERM objectives and formulating the investment strategies to achieve them. In tough times like these, it's simple: we have to go back to that long-term game plan and stick to it (easier said than done, I agree). I still say that, unless you need to make a major withdrawal in the very short term, you have to maintain your positions in difficult times.
Trying to "time" the markets, i.e. getting out when the going gets tough and trying to get back in before the going gets tough, is not a viable long-term solution. Almost every time, people tend to buy back more than they sold, leaving money on the table. No one, not even professionals, can really predict the very short term. So it's better to stay invested at all times, live with the market's ups and downs, and stop watching them for a few months if you find it too emotionally difficult, rather than taking temporary relief by securing your entire portfolio and paying the consequences in the long term.
Obviously, each case is unique. Each person reacts differently, and what's good for one is not always good for another. The important thing is to always find the right shoe for you. The important thing is to sleep well. The important thing is to be comfortable with your investments. Although this exercise should be carried out more seriously during bull markets, it's often during difficult periods (when hypothetical portfolio declines are reflected in practice and not just in theory) that we find out whether our risk tolerance is as solid as we had assessed it to be on paper. If it isn't, we may have to consider making some changes to our portfolio. Ideally, we prefer not to realize losses in difficult times (if the investment remains long-term) and wait for a recovery before proceeding. But, as mentioned above, each case is unique and we need to adjust to each one, hence the importance of annual reviews with our customers.
Finally, if you read through the lines, you'll understand that I'm anticipating a recovery. You're right, there will undoubtedly be a recovery, a strong one in my view, in the sense that not only will we recoup all the losses, but we'll also see significant growth once the last peak has been reached again. The question, as far as I'm concerned, is when we'll see this recovery. Frankly, it's very difficult to predict. Let's close our eyes for a while, let the storm pass, because I don't think it's completely over yet, and hope for the return of good weather, sooner rather than later.
In closing, I'd like to share with you two articles published last weekend on Les Affaires, which support what I'm saying. I think I'm right in saying that what I'm putting forward in this text represents a consensus in the financial community, but it's always interesting to be able to validate it with other recognized professionals in the field. On that note, I hope you enjoyed reading it, and I look forward to seeing you soon!
Why a long-term investor should remain fully invested at all times
https://www.lesaffaires.com/blogues/philippe-leblanc/pourquoi-un-investisseur-a-long-terme-doit-il-rester-pleinement-investi-en-tout-temps/637200
Hold on to your investments during turbulent times
https://www.lesaffaires.com/blogues/denis-lalonde/conserver-ses-placements-durant-les-periodes-de-turbulences/637097
Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
This newsletter is intended to provide general market and security information and is not intended to address your specific needs. The views (including recommendations, if any) expressed in this newsletter are those of the author only and do not necessarily represent those of Pratte Asset Management and do not constitute investment advice for your specific needs.
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